Don't Believe What You Feel
One of my favorite clients called recently to say that her astrologer is forecasting a period of global turmoil and she was thinking of liquidating her investment portfolio and putting her money in gold and bitcoin. “I have a bad feeling about things, “she told me. “And I trust my gut.”
It took a while, but I managed to talk her down from the ledge.
It’s not the first time.
As an investment professional since the early 1980’s, I’ve held my clients’ hands through bull and bear markets, crashes, pandemics, wars, terrorist attacks, and banking crises. We’ve steered through fair and foul weather together and lived to tell the tale.
When clients talk of their gut feelings, I explain to them that intuition, or how we “feel” about the market, is generally the worst indicator we could follow.
Human beings are programmed to heed risk more than reward. We worry as a survival mechanism. We are constantly on the alert for threats. Dwelling on the negative has enabled us to survive hostile, dangerous environments since time immemorial.1
Moreover, we are susceptible to herd-thinking. When our friends are pessimistic, we tend to worry more. When all around us are cheerful, we relax. And we are competitive, constantly comparing ourselves to our peers.2
Financial markets on the other hand have no feelings. To be sure, short term ups and downs can reflect investor emotion ranging from panic to euphoria, but longer term trends are firmly tied to the ebb and flow of corporate profits.
As Warren Buffett famously observed: “In the short run the market is a voting machine; in the long run, it’s a weighing machine.” In other words, while short term movements reflect investors’ transitory opinions and expectations, long term trends measure the hard data of economic production and profitability.3
Buying when we feel comfortable–usually after a period of economic growth, low market volatility, and gains in securities prices–tends to mean we are buying “high”, i.e. when stock prices are expensive.
Selling when we feel most afraid–often during an economic crisis, when markets are swinging wildly and stock prices sliding–tends to mean selling “low”, i.e when stocks are cheap.
And even when we’re not buying high or selling low, our emotions are likely to steer us towards less-than-ideal decisions.
Over the past century, stocks have delivered an annualized return of roughly 10%,4 while bonds have returned about 5%.5 A balanced portfolio has returned something in between, depending on its allocation between stocks and bonds.
The difficulty for investors is that these returns rarely unfold smoothly, but instead come in tightly bundled bursts of activity over just a few days or weeks during any given year. Financial markets are complex systems and it is impossible to foresee exactly when and how all their moving parts–economic, geo-political, and behavioral–will come together.
I have yet to meet an investor capable of predicting, either through internal divination or external analysis, when downturns will occur or when the market will rocket higher.
And getting things wrong by just a few days can make all the difference. An investor who put $10,000 into the US stock market in 1980 would have seen it grow to over $1 million by the end of 2022.6 If she missed out on the ten best days of this forty-two year period, her portfolio would be worth less than half that amount. It should come as no surprise therefore, that relying on intuition to guide investment decisions usually ends badly.
Predicting market movements is a fool’s errand, but statistics can provide us valuable guidance. The stock market has historically gone up more often than it goes down. There are more up years than down years,7 and more up than down days.8
And while returns in any single year can be a crapshoot, there have been few three-year periods when investors lost money, and fewer still five-year periods. Longer term, the odds are even better: Over the past 150 years, over 95% of rolling ten-year periods have been positive.9
In the past century, the global economy has grown and stock markets have risen despite wars, crises, and recessions. As long as populations and productivity increase, this is likely to remain the case.
So when your intuition tells you to sell, remind yourself not to believe what you feel. Trust the data instead, and let history be your guide.
This material is intended for education purposes only. LongView Asset Management, LLC (referred to as "LongView") does not warrant that the provided information will be free from error. None of the information provided is intended as investment, tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon for transacting securities or other investments. Under no circumstances shall LongView be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the materials provided. In no event shall LongView Asset Management, LLC have any liability to you for damages, losses, and causes of action for accessing this commentary. Past performance is not indicative of future results. This content not reviewed by FINRA. Photo by Marek Studzinski on Unsplash.
[1] Tugend, Alina. “Praise Is Fleeting, but Brickbats We Recall.” The New York Times, March 23, 2012. https://www.nytimes.com/2012/03/24/your-money/why-people-remember-negative-events-more-than-positive-ones.html
[2] Hayes, Adam. “Herd Instinct: Definition, Stock Market Examples, & How to Avoid.” Investopedia. https://www.investopedia.com/terms/h/herdinstinct.asp.
[3] McAfee, Andrew Paul. “New book explains the ‘geek way’ to manage a company.” MIT Management Sloan School. Nv 14, 2023. https://mitsloan.mit.edu/ideas-made-to-matter/new-book-explains-geek-way-to-manage-a-company
[4] Maverick, J.B. “S&P 500 Average Return and Historical Performance”. Investopedia. Jan 3, 2024. https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp
[5] Bennyhoff, Don. “Bond Advice for Today's Market: Think Big Picture.” Kiplinger Personal Finance. March 10, 2022. https://www.kiplinger.com/investing/bonds/604297/bond-advice-for-todays-market-think-big-picture
[6] Fidelity Investments. “Stay invested: Don’t risk missingthe market’s best days.” https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/dont-miss-best-days.pdf
[7] https://www.fool.com/investing/2023/08/03/best-and-worst-months-for-stock-market-since-1928/
[8] https://einvestingforbeginners.com/stock-market-days-vs-percentage/
[9] https://www.lazyportfolioetf.com/allocation/us-stocks-rolling-returns/